Monday, 15 December 2008

A theory of 2 companies

Imagine there are 2 companies, Company A and Company B. Both companies are in the same business in town, and their business is rather specialised. This means the workers in this business can only work in Company A or B in this town.

Both companies are actually doing quite well despite the current economic condition. But one day, the big boss of Company A decided to downsize the company. Certainly, with the bad economic state, it’s not that difficult to obtain regulatory approval.

And so Company A retrench say… 30% of its personnel. Of course, they don’t really call it retrenchment. Packaging is important so it’s usually called voluntary separation scheme, flexible separation scheme, this scheme and that scheme. No matter what the call it, people will lose their job. The 70% remaining people in Company A will then become fearful thus will not dare to demand for increment or bonus.

With this, then Company B suddenly went on a recruitment drive and recruited the 30% workers in the market that only Company B can employ, due to their specialised skills. Of course, these 30% workers will employed by Company B at a much lower salary than before. Well, they have been retrenched, not much choice right?

Interestingly, Company B then retrench 30% of its original staff strength. These 30% being retrenched are not the newly employed ex-Company A workers, they are the existing ones. Made sense right? You employ all the ex-Company A workers cheaply, you can then get rid of those in current payroll who are getting much higher pay. Naturally, this also sends a chill to existing Company B workers thus they too do not dare to demand for increment and bonus.

More interestingly, Company A too went on a recruitment drive and employ the 30% retrenched ex-Company B workers. Of course, they are employed at a much lower salary compared to their previous employment in Company B.

In conclusion, 30% of staff changed working place between Company A and Company B resulting in massive reduction in staff cost. The non-retrenched staff paranoid about losing their job thus will not ask for increment and bonus resulting in an even more massive reduction in cost. Since both companies are actually doing well despite the economic crisis, there is a sudden increase in profit.

The big bosses of the 2 companies claim credit for the profit increase and pocket a fat bonus…

Your example is just too simplistic. Anyone who has skills that are extremely specialized will likely be very aware of the job opportunities in the field and will tend to be highly mobile. Your example ignores all sorts of possibilities, for example:

1. Foreign competitors can use this opportunity to either hire these specialist workers or set up shop in the country where the incumbent companies are behaving stupidly.

2. Specialist workers who are aware of this can take this opportunity to find investors to start up a new company to compete with the existing ones. A market dominated by a duopoly implies huge profit potential.

3. The workers can leave the field completely. You do mention that they have specialist skills, but anyone who is intelligent enough to develop highly specialist skills is intelligent enough to get training in alternative but closely related fields in order to find work. This happens all the time in Malaysia from my own anecdotal evidence.

In general, your example is wrong because the more specialized the workers, the likelier that the bargaining power is held by the workers and not the bosses. This is why it is traditionally unskilled workers who need to set up unions to collectively bargain with bosses because skilled workers individually have plenty of bargaining power on their own.

wky ah, in general, during recession time like this, DUN tell crap abt worker bargaining power lar, who want to hire expensive ppl when most cost prices has oso increase, who want to set up/invest new company, change line when most businesses r affected? those who save alot during good time? ya rite how many %

(2) Bosses will work you to death during good times and recycle the workforce during bad. Either way, they win, you lose.

(3) Be a jack of all trades, because if you're not the boss, you're a master of none (emphasis on last word).

(4) With hindsight, ask for the bonus and increment anyway.

(5) Tell Mr. Scrooge he'll be visited by three ghosts on the night of Christmas eve.

(6) It's a friggin' conspiracy!

(7) If they have a strong union, there'll be hell to pay.

(8) Are companies A and B related? If they are, I'm gonna report them to the Inland Revenue for transfer pricing manipulation, damned bastards.

(9) Set up Company C. Which is a boutique version of those arrrogant big guns who think they rule the specialised skill market. There's bound to be a breaking point to their damned economies of scale exercise.

i don't think your example would work. technically, if you hire someone cheap and then the next instance you retrench your existing staff, the person retrenched can complain to labour dept.

if their complaints are valid, then you will know what sort of reputational risk these buggers would suffer.

next, to retrench someone in this country is not easy at all. you have to pay compensation. so the longer someone works in the company, the employer has to pay a certain x factor (can't remember the x factor but must be 1. something) multiple with the number of years in service. again, the cost will be quite high to hit the company in the year they do the hiring and retrenching.

anyway, the times may be bad now but the cycle will change. companies who take advantage of their employees will suffer reputation damage when the word goes around. i know of a number of companies simply couldn't hire good people because of their "reputation".

but then again, if they are fly by night companies, there is no moral to talk about to begin with.

What A Lulu - i believe your situation is during the good times. i am addressing the situation from the current economy condition. i am sure u know what i am trying to get at.

Freethinker - yes, it cant happen again and again and it can only happen during the bad times. but all it needs is just for it to happen once, and a lot of ppl can be affected... Adversely or advantagesly.

giddy tigress - yes, but not large enough compared to the savings.

huei - only during bad times.

wankongyew - yes, it's simplistic, so that ppl can understand and see the point of things rather than beating around the bush and make it complicated. if i want to put down all the variables, it can be a book u know... u also wont have time to finish reading lah.

anon @ 16/12 10.20am - absolutely, during bad times, who dares to claim what they are worth. during bad times, we are all at the mercy of capitalists.

Angie Tan - that's right... the right to abuse... the right to trim... the right to do things to the poor... i hope there is a total revamp to the whole system.

Kellaw - only best for the bosses.

constant craver joe - not side by side... it's one after another and 2 companies let one happen first before the other.

erm - but if you put everything under the light of the current condition... can u have a new competitor? can u set up a new company? a new factory? what if all these specialists are of the blue collar type?

whoalse - that's right... even at this juncture. the world has not humanity.

myop101 - too many factors to consider but i am just putting it as ceterus paribus (hope i get the spelling right). if u consider all other factors, then of cos, things can be different. there may be a payment at the termination date but still, the savings is huge compared to that. LOL at your last comment!

Lim Sze Wei - whether money is there is not is irrelevant. we live in a make-belief world. when people believe money is there, we are all rich. when suddenly money does not appear on paper, everyone panic and go into depression, though many are still living in fantasy believing they are rich.

Daily Nibbler - a smart employee will have to assess the company's real situation before making any unwise move.

i believe the big bosses in competitive companies do have 'connections' with one another and 'pre-plan' some moves.look at the massive banks and financial institutions going down like dominoes in the US. they all knew it was coming. and i don't think it's a coincidence the wall of cards came tumbling down in succession without planning in the behind.